The bonds are scheduled to sell via negotiation on or about Oct. 26,
2016.

The Rating Outlook is Negative.

SECURITY

The bonds are secured by annual appropriations from the state of Alaska
pursuant to a funding agreement between the APOBC and the state acting
through its department of administration (DOA). Funds available for this
appropriation include all legally available funds of the state,
including those from the state's general fund (GF).

KEY RATING DRIVERS

Link to State IDR

The rating on the bonds is one notch below the state's 'AA+' Issuer
Default Rating (IDR), reflecting the need for annual legislative
appropriation. The APOBC is a government instrumentality of the state,
housed within the state's department of revenue (DOR). The rating
reflects the state's general credit standing, sound legal structure and
the statutory authorization for these bonds.

Economic Resource Base

Alaska's economy is largely based on the development and application of
its abundant natural resources, the production of crude oil and natural
gas deposits, prominent fishing industry, and mining and tourism. An
estimated one-third of the state's gross state product is attributed to
the drilling, production, and economic multiplier effects of the
turbulent oil and natural gas sectors; a primary source of vulnerability
for the state. Rapid deterioration in crude oil prices over the past two
years has led to rig closures and reduced natural resource employment.
The state's recent unemployment rate was equal to 139% of the nation's
and has climbed on an annual basis since 2013, prior to the severe,
global decline in oil prices. The federal government is a large employer
and a key driver of the state's economy (an estimated 36% of the state's
economy is derived from federal employment.)

Revenue Framework: 'a' factor assessment

Fitch expects the state to continue to derive an outsized proportion of
its operating revenues from taxation, leasehold interest, and royalty
payments related to petroleum development. These narrow revenue sources
will continue to reflect the economic volatility tied to the extensive
natural resources sector, impeding the development of a more predictable
financial performance. The state has complete control over its revenues,
with an unlimited independent legal ability to raise operating revenues
as needed.

Expenditure Framework: 'a' factor assessment

The state maintains solid expenditure flexibility with a manageable
burden of carrying costs for liabilities and the broad expense-cutting
ability common to most U.S. states. As with most states, Medicaid
remains a key expense driver, and Fitch believes the state will be
challenged in meeting increased expenditures due to insufficient
expected revenue growth.

Long-Term Liability Burden: 'aa' factor assessment

On a combined basis, the state's net tax-supported debt and unfunded
pension obligations are well above the median for U.S. states as a
percentage of personal income, driven primarily by sizable unfunded
pension obligations for the closed public employees and teachers
systems, including portions of both systems' liabilities associated with
local and school employees. Net tax-supported debt is below average for
a state. Other post-employment benefit (OPEB) obligations are sizable
but nearly fully funded. Both pension and OPEB liabilities are
constitutionally protected benefits.

Operating Performance: 'aa' factor assessment

The state's strong management of its financial operations and
extraordinarily sizable reserve balances has historically offset
volatility in its revenue sources; however, the state ended fiscal 2016
with its fourth consecutive operating deficit and a sizable deficit is
expected in fiscal 2017. Available reserves are forecast to remain
strong at the end of fiscal 2017 under various scenarios although
eventual depletion is expected absent revenue reform, sharp expenditure
reductions, or a return to more robust oil prices; a scenario that
Fitch's views as unlikely through the medium term. While the state's
permanent fund is robustly funded, the principal may only be accessed
through an amendment to the state constitution, which is a limiting
factor.

RATING SENSITIVITIES

LINKAGE TO STATE OF ALASKA: The rating on the pension obligation bonds
is sensitive to movement in the state's IDR, to which it is linked.

The bonds currently offered are special obligations of the APOBC,
payable solely from payments received by the corporation from the state
and equal to debt service on the bonds. The payments to the corporation
from the state are pursuant to a funding agreement between the two
entities, subject to annual legislative appropriation, resulting in a
rating that is one notch below the state's 'AA+' IDR. The DOA has
pledged to include in the state's annual budget all payments required by
the agreement and the bond indenture, including that in each fiscal year
it will request that the DOR provide a loan to the corporation should
insufficient funds have been appropriated to make a funding payment.
POBs were specifically authorized by the state legislature in 2008,
providing that certain conditions were met, as part of the Retirement
Cost Funding Act.

Proceeds of the POB will be deposited to the state public employees'
retirement system (PERS) defined benefit (DB) trust and the teachers'
retirement system (TRS) DB trust, to bolster funded ratios for these
plans, with the goal of lowering future required actuarial contributions
to the system. Given that POB debt is expected to replace existing
unfunded pension liability, Fitch views the transaction as having
limited impact on the state's liability profile.

Both PERS and TRS are cost-sharing multiemployer systems that provide
pension and post-employment health care (OPEB) benefits to eligible
retirees of the state, local governments and school districts. Although
the state's unfunded pension liabilities are sizable relative to income
resources, the state has worked to curtail the growth of obligations.
Both plans were closed to new employees as of June 30, 2006, and
employees hired since then are enrolled in defined contribution plans.
As the DB plans are closed and accrued benefits are guaranteed by the
state's constitution, no additional benefit reforms are currently
anticipated by Fitch, although changes in actuarial or economic
assumptions are possible.

Funded ratios have improved materially given the state's 2015 deposit of
$3 billion in excess operating resources into the systems. The pension
funded ratios for TRS is 76.9%, and for PERS is 67% as of their June 30,
2015 valuations, based on the systems' 8% return assumptions. These
ratios exclude the OPEB obligations for DB participants, which are
nearly fully funded under current assumptions.

All participating governments, including the state, local governments
and schools, are required to contribute a fixed percentage of their
payroll to Alaska's pension systems. Additionally, the state contributes
a separate, variable non-employer contribution (NEC) over the fixed
threshold for its own employees and all other participating governments,
sufficient to match the actuarial rate determined annually by each
system. This provision provides contribution stability to local
governments and schools while exposing the state to the risk higher
contributions in the event of adverse system experience. Issuance of the
POBs would change neither the fixed employer contributions nor the
state's statutory requirement to pay the NEC. Actuarial contributions
are based on a closed 25-year amortization period as of June 30, 2015.

STATE ANNUAL CASH FLOW SAVINGS ANTICIPATED

The state forecasts significant annual cash flow savings from this
financing based on reducing its NECs. Assuming issuance of $2.3 to $3.3
billion in par, and depending on the impact of actual investment
experience on pension invested assets, the NEC for PERS and TRS, which
is budgeted at $216 million in fiscal 2017, is expected to be reduced to
under $50 million in fiscal 2018. Based on long-term investment return
scenarios including at a lower, 7% return assumption, the residual NEC
would rise until the maturity of the POB in 2039. When combined with the
fixed debt service on the POB, the transaction would still provide
substantial annual cash flow savings relative to projections without the
POB. The maturity schedule of the POB approximates the closed period
amortization for the systems' UAALs.

Fitch cautions that achieving even a 7% return assumption over time
carries risk given recent market performance and the historically low
interest rate environment. As the POB structure seeks to maximize cash
flow savings relative to current assumptions, the investment returns on
the POB proceeds must exceed the cost of borrowing for this issue over
time to result in savings. Given the state's responsibility for the NEC,
the risk of long-term underperformance would be carried by the state.

STATE OF ALASKA IDR

Alaska's 'AA+' IDR reflects the state's maintenance of very substantial
reserve balances and conservative financial management practices to
offset significant revenue volatility linked to oil production from the
North Slope and global petroleum price trends. For many years, the state
focused on expected declines in production at its oil fields, prudently
dedicating a substantial share of its past oil tax revenue to reserves
to ease anticipated revenue loss due to the declines. However, the steep
drop in crude oil prices beginning in late 2014 exceeded expectations
and significantly reduced tax revenues to the state, requiring sizable
use of reserves to fund operations in fiscal years 2015 through 2017.

The state's enacted budget for fiscal 2016 funded unrestricted general
fund (UGF) expenditures of almost $5 billion, a 19% reduction as
compared to fiscal 2015. The budget incorporated expected soft crude oil
prices and was supported by a planned $2.7 billion draw from reserves.
Actual crude oil prices that were below forecast combined with actions
taken by the governor and legislature resulted in a larger $3.9 billion
budget gap (75% of the UGF budget). The state funded the gap by drawing
on reserves, bringing the reserve balance at year-end to $14.4 billion,
equal to 2.8x the UGF budget.

The enacted UGF budget for fiscal 2017 totals $4.4 billion, a 16%
reduction from fiscal 2016. The enacted budget continues the state's
reliance on reserves to fund operations as most revenue raising
proposals and a proposed funding shift related to the state's Permanent
Fund Earnings Reserve (PFER) were not approved. The legislature did
approve changes to the state's tax credit structure for crude oil and
natural gas production to provide savings in future fiscal years, but at
a cost of $430 million to the fiscal 2016 budget. The enacted fiscal
2017 budget incorporated the governor's veto of one-half of the
statutorily-determined permanent fund dividend distribution, reducing
the distribution from the PFER by $665 million. Considering these and
other measures, the state anticipates a reserve draw of $3.17 billion
(73% of the UGF budget) to fund operations. Due to the reduction in
expenditures, reserves at the end of fiscal 2017 are expected to total
$12.3 billion, equal to 2.8x the UGF budget.

For further information on the state, please see 'Fitch Downgrades
Alaska's IDR to 'AA+'; Outlook Negative' dated June 14, 2016, available
at 'www.fitchratings.com'.

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